Hedging Techniques for One Touch Options

Nobody likes losing money in the markets, and this is where longer term trading techniques such as trades involving One Touch type options, can be hedged in many different ways. Hedging allows you to limit losses, recover much of these losses using a different trade, or even hedge 100% so that you no longer win or lose money for several days, until a solid trend appears.

Hedging against being wrong on market direction

Consider the example below, where a trader buys the market at the spot indicated by the green arrow by placing a bullish One Touch option trade, expecting to profit from the subsequent rally. But due to bad timing, as you can see, the market dropped in the early days, thereby taking much longer to finally reach all the upside targets. One way to hedge this trade, is to choose a high payout option, with short expiry, maybe just 2-3 days, and as a price target the red band line, as seen at the time of taking the trade. The objective is to recover the loss on the bullish One Touch option, at least in part, without paying a fortune. Remember that the longer term bullish One Touch option trade, will have a very high payout, typically in this case it can be 500% - 900% depending on the expiry date chosen. Therefore if the market rallied straight away from the green arrow point up, you would make a big profit, big enough to cover both trades and leave a nice profit for you. If the market dropped, as it did in our case, the bearish trade could have covered all trading costs again, yielding no net profit, but having averted loss. This is all due to the Bollinger Bands indicator giving you a crystal clear price target, which is the opposite band line.

There's a risk however, that both trades would lose, that is if the market moved in a very tight range, due to lack of volatility. If it turns out that the market develops a tight trading range, then you will be in trouble. And you would have to resort to a third type of hedging to hedge against what is now a trend-less market!

This third type of hedging would require you to confirm that the trend is very weak, and the market is indeed trend-less, and would likely remain so for days to come. In this case you can hedge using range defined, No Touch options. Or you can resort to short term, possibly hourly Call and Put binary trades, in the opposite direction that the market has just moved in the last few hours. This short term trading is essentially taking advantage of the market's inactivity, but can still allow you make many 1 hour trades, with up to 90% payout each time.

If for example you have risked $100 on the 2 One Touch options (the original bullish trade and the bearish hedge trade), you don't want to close these at a loss. You have the odds in your favor now to either place a No Touch range option trade and walk away or deal with the market one day at a time, and trade 1 hour small binary trades. In the case of the 1 hour trades (simple binary Call and Put options), you would need to risk $100 per trade, with the chance to win back $190 each time. If the market stayed inactive (in a tight range) for days, you could expect now to entirely lose on your longer term options, but still make $1000s on the multiple hourly trades.

Hedging Against Trend-Less Markets

Hedging, using 1 hour trades can be used in the second example also, as indicated by the red arrow on the above chart. As you can see the trader expected the market to drop in this case, and to reach the bottom band line, so they have placed a bearish One Touch trade. They expected the market to drop down about 200 pips but it didn't. It just dropped a little, then went sideways, then up again. In this case again, you don't want to close the original trade at a loss, in case the market does go down eventually. Instead see how much you are risking on the original trade and try to recover that using 1 hour trades. If you see closely, the market provides 10 flat (directionless) days and only 2 trending days, one down and one up. These trend-less days have many trading set ups, where you simply wait for the market to move in one direction, then you make a binary trade in the opposite direction. You can use the ADX index indicator on the charts to further confirm a trend-less market on your time frame. You risk $100 on each hourly trade, in order to win back $190, or even less, maybe just $120 or $150 on trades closed early. But the high frequency of these trades will allow you to place many trades, as many as 30 per day! For an average profit of $50 per trade, this works out to $1500 per day!

Brokers to Use

You can use many different brokers for the longer term One Touch type trades.

However, for the 1 hour binary trades we usually use EZTrader, Optionfair or GOptions, as they are reliable and offer the highest payouts, some of them higher than 90%. These 3 brokers offer exceptionally good service for hedging trend-less markets; suiting our short term binary Call and Put option trades. Remember it doesn't have to be exactly one hour in duration. It can often be less than one hour, or even 10-20 minutes, giving you even more trades. But always aim for up to about 90% payout when in the money and typically 20% to 50% payout on many other trades closed early. Generally it’s a good idea to have accounts with several brokers and trade with the one who offers the highest payout on each asset.

Ignore the Low Risk – Reward Myth

Remember that, one hour trades, when trading in high frequency using our trendless market hedging technique, will often require you risking $100 to win $30. This is a Risk-Reward ratio of 3,3 which seems ridiculously risky to many traders. This so called Risk-Reward ratio statistics is often meaningless and poorly defined. Remember that unless you price in the probability of winning, and overall ratio of winners to losers, the Risk-Reward ratio alone is meaningless. Yes you do risk $100 to win $30, most of the time, when hedging against a trend-less market! But remember that you will stand to win very often, as many as 30 times or more in a day! As you can see profits pile up fast using this hedging strategy. If volatility finally breaks out and the market makes a sharp move in either direction, one of your One Touch binary options will make a significant profit. If the big payout trade is successful, it will be a multi-fold gain. Until this happens you keep making many small trades, making an easy profit each time.

Next: Identifying Price Targets for One Touch Binary Option Trades